Use Transactional Funding – What You Need to Know
I get at least a phone call a day asking how transactional funding works. I also get asked what is needed to borrow money for a double closing. Transactional funders loan 100% of the funds to purchase a property. It’s critical that an investor lines up a funding source well in advance of his or her closing. Transactional funding ideally takes place on the same day. At most, it takes place within a couple of days of the first leg of a double closing.
A double closing consists first of an investor “purchasing” a property from a seller. This investor will then as quickly as possible resell it to an end-buyer. The end-buyer may rehab it, resell it again or keep it for a rental. The two transactions are designated as the A – B leg and the B – C leg. The letter designations imply that A = original seller, B = investor first as a buyer and then as a seller and C = the end-buyer in this transaction.
This process seems simple enough until all the parties get closer and closer to the closing table. Things can go wrong. Examples of problems are title issues that have to be resolved or accepted by the buyer, buyers or sellers changing their minds and funding problems for the end-buyer. These are some of the reasons that careful planning of an investor’s funding source is critical.
Typically title issues that can’t be resolved before the A – B closing will stop most transactional funders from lending the A – B funds. However, if the end-buyer is willing to accept the known title deficiencies and sign a Hold Harmless Agreement at the B – C closing, most lenders will fund the A – B leg.
So, what is needed from an investor to request transactional funding from a lender? The following items can’t usually be provided all at once. However, they will be available before the actual closings. This list likely varies from lender to lender but here is the minimal expectation that an investor should have:
- Contact information for the investor borrower
- Signed contract from the original seller (“A”)
- Signed contract with the end-buyer (“C”)
- Contact information for the closing agent or closing agents if more than one is involved
- Preliminary and Final HUD closing statements for both legs of the transaction
Both transactions should only be done with wired funds to avoid fraud. Cashiers’ checks and money orders are too easily counterfeited. The transactional funder will wire his funds to the closing agent’s escrow account the day before or the day of the closing. The end-buyer should wire in his funds in 24 – 48 hours in advance of the B – C closing. Only when the end-buyer’s funds are “cleared” and in the escrow account should the two closings take place.
If there is a delay between the closings that doesn’t allow for them to close on the same day, you no longer have a transactional funding situation. This situation is called an extended transactional funding. It can also turn into a hard money loan depending on the lender. This situation puts the lender in a higher risk position. It is why borrowers pay more money for these types of transactional funding closings.
Start looking for a transactional funding source that has reasonable rates. They should not charge additional junk fees such as a membership, document preparation or inspection fee. It is also important to interview your potential lender so you are confident he will send the money when needed. If he has any last minute reservations your deal could be lost. So always keep the lender informed about what’s happening with your end-buyer and original seller coming to closing timely.
In summary, your transactional funder is providing all the money for a transaction so you can make a profit with no monetary investment. This is wonderful for you. However, he has 100% of the money at risk in the transaction. If you have done your research properly, your funder receives only a modest funding fee if all goes well. Keep this risk reward situation in mind if he seemingly wants more and more information about the people involved in the transactions.
To your limitless success,